CHINA

The Great Awakening

Historical Background
The Peoples Republic of China developed from: The Soviet central-planning system

with its information, incentive, and inflexibility problems.

Historical Background
The Peoples Republic of China developed from: 2. Cultural confusion and economic disaster stemming from Mao Zedong

China Under Communism: 19491978

The Great Leap Forward, 1958-1960
Maos version of Soviet Style Central Planning Forced industrialization A steel mill in every back yard Disappearing tools and famine

China Under Communism: 19491978

The Cultural Revolution
Deng chief of the capitalist roaders Red Guards and permanent revolution Movement to the countryside

Enter Deng Xiaoping, (Three Times Altogether)

The Reforms of Deng Xiaoping

Phase 1: Reform the Countryside, 1974-1978 Private plots and state farms in agriculture Higher state procurement prices Quota at state prices, excess for market prices Sale of surplus for cash

The Reforms of Deng Xiaoping

Phase 2: Financial and Enterprise Reform 1983, SOEs must meet negotiated targets, but can then sell in markets. Managers set wages, make investments, retain profits.

The Reforms of Deng Xiaoping

An open door policy announced 1979 Four Special Economic Zones were created with
Tax incentives Foreign exchange provisions Lack of regulations Markets function!

SEZs located in:

Guangdong Province Fujian Province Hainan Province Hunchun Pudong Development Zone (Shanghai)

The Purposes of SEZs

As a laboratory to provide experience for inland regions economic reform and development. Promote Inflows of foreign investment, technology, and managerial techniques

Policies in the SEZs

Domestic decentralization, no planning or regulation from center Tax incentives to foreign investors

The Result: an Example

Shenzhen, a small border town, changed into a modern city In the early years, the average annual growth rate was over 80 percent

The Result: an Example

Per capita GDP was 7 times the nations average Foreign investment and exports have been the primary engines of economic growth

Shenzhen: The Early 1970s

Shenzhen: Today

The Reforms of Deng Xiaoping

Phase 2: Financial and Enterprise Reform The economic boom continued, but There was political rebellion (Tiananmen Square, 1989) and subsequent retrenchment

But Communistic Legacies Remain

The State-owned enterprises remain a part of contemporary China, and they need reforms. The Communist Party of China remains and needs reforms. Authoritarian methods and bureaucratic traditions likewise remain.

SOEs and their Reform

What Causes The Problems?

Central economic planning rather than market economics State Owned Enterprises (SOEs) need shutting down: they serve a social (employment) function rather than an economic function

Where is China at Today?

The Asian Crisis after the mid-1990s slowed the economy down Incredible growth rates become more difficult to sustain with growing maturity.

Effects: Growing Maturity and the Asian Crisis

China's Economic Growth 10 8 6 4 2 0 1996 1997 1998 1999

The Old Guard: Passing from the Scene?

Jiang Zemin, Dengs heir to power

The Party Today

Hu Jintao, Elected General Secretary of the CPC and President of the Peoples Republic of China, March 15, 2003.

The Current Scene

China has retained an open economy There has been a long period of sustained, rapid economic growth The huge market is a magnet for investments and trade

The Current Scene

The global economy puts tremendous pressures on Chinas political system. Change is gradual, since the party wishes to perpetuate its own power, but change does go on. Reforms are tentative, the party is not moving quickly toward price liberalization, currency convertibility, or reduction of subsidies.

The Bureaucracy
Although bureaucracy constrains the devolution of power, the decline of the partys power was made possible through the person of the general secretary. Since Deng, we have not seen dramatic individual leadership, but plodding, collective leadership.

Political Leadership Since Deng

The current regime feels fairly secure in having demonstrated peremptorily at Tiananmen Square a willingness to assume a comply or die stance.

Leadership Since Deng

As a result, the party has probably guaranteed that those favoring political liberalization will never again give support freely. It is not highly probable that the CPC will be a part of a peaceful evolution all the way to democratic government.

Political Environment Since Deng

The process of democratization began at the same time as the economic reforms, and modest progress has been made since.
Officials falling out of favor are retired rather than executed. Retirement permits promotion of younger officials resulting in more harmonious government.

Political Environment Since Deng

Purges no longer occur The National Peoples Congress has been strengthened The legal system has been reformed to prevent any further cultural revolutions. Individual acts of selective repression by the party continue, but mass repression has been absent since the Tiananmen Square debacle.

Political Environment Since Deng

With the passage of time, stronger market and international forces will press the party for further human rights progress. The worlds focus on the Olympic Games of 2008 will encourage progress.

Unpremeditated Devolution
Greater independence of the Special Economic Zones made the retention of central control more difficult for Beijing.
In 1993, Beijing attempted to enforce economic austerity, but the policy failed mostly because of the resistance of the more prosperous provinces that were earlier the SEZs.

What is Chinas Future? What is the Future of Chinas Market?

Proposition: The planning system constrains market development and growth. Chinas bureaucracy, colossal even before central planning was adopted, continues to function (or hinder functioning).

Authoritarian Controls still needed?

The Party believes that the process of economic development will require authoritarian leadership for some time to come. Dissent will have to be managed while painful reforms are administered to the SOEs and their hundreds of millions of employees, millions of which will likely have to be sent into unemployment.

Building Markets Over Time

But the state now controls less than half the economy and owns less than a quarter of it. The abrupt elimination of plan and party in the Soviet Union left no time for market institutions to be developed. The Chinese have been developing markets and market competence gradually.

Building Markets Over Time

Functioning markets require much management: banking and finance institutions, labor legislation, regulation of industry, environmental regulation, regulation of competitive activities, and of international trade.

Jiang ZeMin Reforms

Economic Reforms
Effort to reduce labor hoarding Substitution of a contract system for lifetime employment guarantees Development of a wider wage distribution as an incentive for labor

Economic Reforms
Reforms have also attempted to: Allow management greater decisionmaking prerogatives Impose greater accountability for the bottom line on enterprise management Promote greater labor discipline on the shop floor.

Chinese Communist Party Statement July 1, 2001

Most people in the private sector are engaged in honest labor and work, obey the law, and contribute to society. Henceforth, the best of them will be allowed to join the party.
i.e., Capitalists can join the party! - Jiang Zemin, Party General Secretary

Market or Market Planning?

The market continues to coexist with the plan. The SOEs continue to exist at great cost. Planners make managerial decisions without information available at the enterprise level.

The SOEs and Unemployment

By 1998, nearly 1/3 of the

labor force was unemployed or underemployed. Millions of SOE employees were laid off in the late 1990s.

The SOEs and Unemployment

The SOEs are supposed to provide unemployment help, but many are unable to. Millions became itinerant wanderers when they couldnt find private sector employment

Market or Market Planning?

Central planning destroys incentives, isolates the planned economy from world markets, produces technological stagnation, brings mining and manufacturing to the brink of ecological disaster, and taints the economic future with destructive legacies.

Market or Market Planning?

The Soviets dropped planning to rebuild from nothing, corruption filled the vacuum. In China, we wait for the other shoe to drop. When will central planning be dropped from the core economy. The last party congress promised it would be, but offered no published time plan.

Market or Market Planning?

Will China simply gravitate toward a typically statist planning similar to other major countries in Asia, e.g., Japan and Korea? Those systems have been struggling since the Japanese depression and the Asian Crisis broke out.

Market Regulation
Learning to design and implement regulatory measures may be as difficult for China as it is currently to control corruption or collect taxes. Such implementation requires a complex set of administrative agencies and policy enforcement mechanisms. Nor is keeping regulation at reasonable levels a simple task.

Can market and plan be combined?

Overall economic direction includes protection of inefficient industries, fixing the value of the yuan, and statist planning at the regional level. Picking industries, subsidizing, and protecting them has been common. There has been a tendency to pick identical industries and generate excess capacity.

Can market and plan be combined?

But Chinese gradualism may prove less painful than the Soviet transition. It can begin to learn how to promote, manage, and regulate markets even before the planning sector disappears.

Schumpeter and Social Groups

The roles played by particular groups, such as managerial and academic leaders, was addressed by Josef Schumpeter. Social leaders, the professional and technical classes, will articulate the demand for material, educational, and other improvements.

Schumpeter and Social Groups

Surveyed Chinese managers have expressed their preference for the development of market structures and democratic initiatives as the country modernizes. They seek more
personal freedom, individualism, autonomy and self-responsibility

Another Chinese advantage: An Open Economy

Dengs early desire to link to the global economy was much more far-sighted than the autarky that crippled the Soviets over their entire existence. As early as 1980, China renewed its membership with the IMF and the World Bank.

China and the WTO

After more than a decade attempting to gain admission to the WTO, China officially joined on December 11, 2001 China became the 143rd member.

The WTO
The WTO was created in 1995 from the former GATT, General Agreement on Tariffs and Trade. Main purposes: Develop rules of trade with minimal negative side effects

The WTO
Main purposes: Serve as an international forum for further trade negotiations Handle trade disputes among nations

Membership Benefits to Chinas Economy

China obtains stable access to foreign markets Foreign investors will continue to be active in China

Benefits to Chinas Economy

Long-Term benefits Reward efficient firms which become competitive Weed out weak firms, using their resources more effectively elsewhere

Let China sleep, for when it wakes, it will shake the world. -Napoleon